Western states lead the country in percentage of their population employed by startups, according to data recently released by the Kauffman Foundation and the US Census Bureau.

Startups accounted for three percent of jobs nationally from 1980-2005. But the numbers vary widely from state to state.

From 2000-2005, five Western states had the highest average rates of workers at startups, each boasting at least 10 percent. Major hotspots include Nevada, Idaho, Wyoming, Montana, and Utah. The states with the lowest percentages hovered around six percent, including Connecticut, Ohio, and Massachusetts.

"The western states aren't that populated and they are a pretty free market—low regulation, low taxes, low population, frontier spirit," said Robert Litan, Kauffman's vice president of research and policy.

The study also found states with the highest percentages of startup employees were the most dynamic, demonstrating the greatest rates of firm birth and death. This is because new firms push inefficient competitors—both new and old—out of the market.

"The point is, you are unlikely to have a high birth rate without a high death rate," said Litan.

But that high rate of churn is ultimately beneficial, Litan argues: "Economies that are vigorous are good at creative destruction."

The most interesting results come from California. While famous for its Silicon Valley startups, the state is only seventh in the rankings. But given its sheer size and the weight of other, older economic sectors, the high percentage is surprising, Litan thinks.

"The vigor of Silicon Valley is still high enough that California is punching above its weight, so to speak," he said.

Published on: Feb 25, 2009